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- Introduction to Anti Avoidance - Anti-Avoidance Measures CA Final International Taxation Elective Paper 6C - Arinjay Jain
TAX AVOIDANCE
“Tax avoidance” is method through which, a person either reduces their tax liability, or does not pay any taxes. However, the method employed for tax avoidance, do not violate any tax law.
There is always a thin line of difference between acceptable tax avoidance, which is also known as tax planning (which is legal) and unacceptable tax avoidance (which is illegal). Let us understand these in detail : -
TAX PLANNING
OECD defines Tax Planning as
“an arrangement of person’s business and or private affairs in order to minimize tax liability” by the use of tax preferences given under the law or by means that the tax law did not intend to tax.
Thus, in order to constitute Tax Planning, the following conditions are applicable :
• A taxpayer arranges its business in a manner, that minimizes tax liability ;
• The arrangement of business makes use of the following : -
o Tax preferences specifically given under the law, like Section 80-IA benefit to companies engaged in generation or distribution of power; or
o Results in outcomes that the tax law did not intend to tax. For example, where a person A, purchases a property from a relative B in a commercial transaction, but instead of making the cash payment to B, A obtains it as a gift from B, and pays consideration through gift to B’s wife in such a way, that it is exempt from tax. Here the intention of the law was to provide exemption for cases of gifts, where no cross considerations are involved.
TAX EVASION
OECD defines Tax Evasion as :-
“illegal arrangements where taxpayer pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities’’.
Thus, in case of Tax Evasion , the following takes place : -
• Taxpayer pays lesser tax than his legal obligation
• This is achieved by either hiding income , or information which may result in taxation from the tax authorities.
TAX AVOIDANCE
“Tax avoidance” means arranging affairs where the main object or purpose or one of the main object or purposes of the arrangements are to obtain tax advantages, although the arrangement, even though it could be strictly legal, is usually in contradiction with the intent of the law it purports to follows.
Thus, one can identify the following characteristics in case of a Tax avoidance:
• Obtaining tax advantages is the main or one of the main object’s of how the Taxpayer’s affairs are arranged
• Such arrangement could still be strictly legal ;
• The arrangement are usually in contradiction with the intent of the law, which it shows its following.
TECHNIQUES OF TAX AVOIDANCE
METHODS OF USING THE TAX AVOIDANCE TECHNIQUES
Anti-Avoidance measures are either a part of the tax statute by specific incorporation therein or developed by the judiciary over a period of time.
